Venezuela's oil and the Chavez premium

By Aleksander Boyd

London 26.01.05 | One of the good things of living in London is that one gets the leaks coming from the oil industry in real-time. As such I have learned about a few in the past weeks. Hugo Chavez is a very well known figure in the oil industry for all the wrong reasons. Industry analysts and traders alike came up with a definition that encapsulates neatly what the Venezuelan president represents to the oil market; i.e. the Chavez premium. Let us not forget that the whole 'Bolivarian revolution' and its continental expansionist plan is built solely on Chavez' ability to use oil funds to destabilize governments, fund terrorism and insurgent movements. We have learned how Evo Morales and Antauro Humala have received petrodollars; we have seen how weapons have been acquired in Russia (for what purpose if not to equip his Colombian narcoterrorist friends and other anti-democratic elements?); we have also seen how Chavez has castigated backwater economies using oil as a political tool, read El Salvador and the Dominican Republic; Fidel Castro and his regime have been granted free oil; in sum sitting atop the western hemisphere largest oil reserves is indeed a huge advantage.

The Chavez premium consists basically in the market reaction to Chavez' actions. Every time he utters his nonsense -which happens on an ever recurring basis- the oil market reacts; the late volatility of world energy prices is due, in no small measure, to Hugo Chavez. The other factor that one must take into account is that PDVSA's decreased output, resulting in less cash for revolutionary purposes, means that whatever number of barrels being produced ought to be sold at the highest possible price. Hence, we have somebody who could not care less about stability or economic growth effectively calling the shots and acting in irresponsible fashion. PDVSA is producing 1.5 MBD; strategic partnerships between PDVSA and foreign companies (mainly American) produce an additional (1) MBD to bring the total figure to 2.5 MBD. So what does a revolutionary do when numbers go down? He 'revises' contracts and agreements with foreign operators and unilaterally decides to raise royalties, he stops projects or simply closes the spigot. Another efficient method, to maximize earnings, is to cede trading rights to third parties.

Thus Harvest Natural has been ordered to suspend exploration activities; ConocoPhillips's plan to develop one of the most promising new fields gets stopped; crude sales to Hess-Shell refinery in St Croix are canceled; new energy alliances (Cerro Negro crude shipments to Petrochina) are forged at the detriment of long standing relations with the country's biggest customer and other less orthodox and unforeseen measures, such as allocating 55.000 BPD to non-PDVSA traders, provide a clear example of the chavista style of management. Apart from the aforesaid one learns that PDVSA is being sued in different courts for contract breaches, one sees how PDVSA account fillings are delayed for the third year running. Transparency? Well...

Venezuelan crude is not your average light Saudi oil. For that reason it is sold below the market's benchmarks (Texas, Brent). Should the market benchmarks' price descend Chavez gets in motion threatening to cut supply to the US or rolling out his 'revisions', suspending projects, etc. Chavez has had an incredibly negative impact for the stability of the energy market, although somewhat responsible for the sudden increase from former price band ($22-$28), his actions certainly bring benefits to Big Oil and to a lesser extent to himself. As one oil expert put it once in an LBS conference "Chavez is applying to PDVSA the same rule implemented by the Ayatollah to NIOC; i.e. to completely destroy and dismantle the former management structure to convert it into his own badly managed, unproductive but totally self servient company". The problem is that Western countries, and its inhabitants, pay the price where it hurts the most.